Question

9. The Arbitrage Pricing Theory Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply. The APT does not restrict the number or nature of the factors relevant to the determination of a stock's return. The APT assumes that all investors hold the market portfolio. The APT is more restrictive than the Capital Asset Pricing Model (CAPM). The APT does not identify the relevant factors.

Answer 1

9. 1st and 4 th statement is correct.

APt does not restrict the number of factors because it is a multi factor model but CAPM considers only one factor and that is market factor .Therefore APT is less restrictive than CAPM .

But the major drawback of APT theory is that it does not identify or specify relevant factors.

Using the APT model.Required return =risk free return +inflation premium * inflation factor+industrial production premium*industrial production factor+risk bearing portfolio premium*factor of risk bearing portfolio

Hence required return=8+(13-8)*0.9+(10-8)*1.2+(6-8)*(-0.7)

=16.3%

Hence correct answer is option B

Using CAPM model,Required return= risk free return+(market return-risk free return)*beta

=8+(15-8)*1.1=15.7%

Hence correct answer is option D